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Sterile controversy over index funds

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Summer readings never cease to amaze me. At the end of August I take stock and highlight the one that most caught my attention. This year the award went to an article published in an important economic medium that "accused" an automated manager of those who operate in Spain of exactly copy the index fund portfolios of another competitor.

Nothing new under the sun. The basic concept of an index fund, in itself, explains that we are looking at a copy. I don't know if thinking that just the lack of financial training can make this news surprise someone, but those of us who work in this important fund industry know that all participants will have the same portfolio if they have the same benchmark. That is more than obvious. And that is not reportable, nor is it to say that these types of funds are expensive because they charge a management fee when they are not managed, they are only managed.

I don't want to get into technicalities because we will always come to the same conclusion. This concept was invented in the US in the 1950s and since then many have copied it. If we had more financial training, this would not be discussed. Indexes are synonymous with copying. One cannot speak of active management, because there is none, neither of managers, nor of risk. It is simple and straightforward to replicate an index, so the cost should be minimal since copying is the cheapest there is.

In total, there are more than 20,000 different indices in the world. Thus, the job of the index fund issuer is to choose one of them and replicate it. The most widely replicated indices are the Morgan Stanley Capital Global Index (MSCI) and Global Fixed Income, which have a geographic distribution based on their weight in the market. Creating portfolios combining both assets in percentages that are multiples of ten is the most basic way of assembling these portfolios and one of the most used.

So investors who opt for this passive management model should know that it does not provide the intelligence of the managers, nor their ability to find assets that are more profitable than the chosen index itself. That is the main difference with active management, in which the day-to-day management of managers move between analysis and decision-making.

In this digital medium, I have spoken at length about both models on other occasions, both valid of course. Now that the course begins, it is time to choose the one that best suits your investment idea.

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